Should you be splitting your mortgage?

Monday, 24 October 2016

'Mortgage splits' aren't as difficult to do the real thing.

Doing the mortgage splits has real benefits for homeowners who learn how.

But mortgage brokers say many haven't learnt the art of splitting their home loans over different fixed and floating periods.

Mortgage adviser Karen Tatterson says it can take people time to learn mortgage management skills.

Instead they just stick their whole mortgage on a single fixed rate loan.

Banks have just under 625,000 floating rate mortgages on their books, and just over 900,000 fixed rate mortgages, adding up to an eye-watering $228 billion of home loans.

* Customers complain to Ombudsman about banks' break fees

* Is it a good idea to break your fixed-term loan to take a better deal?

* How to pay off your mortgage in 10 years**

Just how many homeowners are doing the mortgage splits is unclear, but groans of pain from people who fixed their home loans only to see rates drop to historic lows show some aren't.

The Banking Ombudsman has seen a spike in complaints over mortgage break fees which banks charge to borrowers who want to break fixed term loans and refix at a lower interest rate.

It's a sign, say brokers, of our unsophisticated mortgage market in which too many people make no attempt to spread interest rate risk.

FIRST MORTGAGE

Loan Market's Karen Tatterson says first-home buyers don't often split their mortgage.

'A lot will just fix it all for a year until they get used to making repayments,' she says.

Most want certainty their mortgage repayments won't go up, if interest rates do.

'Most people are going into their first home on a shoestring.'

They're not clued up on how mortgages work either.

Unless they have got advice, their only help may have been bank mortgage calculators which people to price out different splits, like Westpac's and ANZ's.

It's shock that wakes homeowners up to active mortgage management, including mortgage splitting, Tatterson says.

'Most people don't realise that in the first five years you pay so little off the principal,' she says.

HAMMER AND TONGS

Splitting between floating and fixed rate loans is often a sign people are working hard to pay off their home.

It's a formula used by New Zealand Home Loans, where people put part of their mortgage onto a floating rate loan, and the rest onto fixed-rate periods.

The sum people stick on floating is the amount they can pay off, if they go hard, before the first floating chunk comes up for refixing.

It's a high-commitment, high-discipline strategy, but it can take years of the repayment time, and save a fortune in interest.

Some use personal financial trainers like EnableMe to help keep them on track.

HEDGING RISK

It's tempting to try to 'forecast' interest rates in a bid to fix just before rates start to climb.

The trouble is, people are very bad at predicting when rates will rise, or fall.

The break fee complaints to the Banking Ombudsman are a result of people forecasting rates rises.

'Three years' ago people took five-year rates of 5.99 per cent,' Tatterson says.

One year fixed rates are now below 5 per cent.

Peter Norris from Squirrel Mortgages believes most people don't try to forecast the market.

'They just chuck it all on one fixed period at the best rate they can find,' he says.

They're not trying to be smart, just keep their weekly repayments low.

'Over the last couple of years the one year fixed rate has been the lowest.'

Reserve Bank figures show the amount on one-year fixed rate loans has risen from $63b to $92b.

'The prediction for most of that time was that rates were going to go up at some point,' he says. 'They just haven't done it.'

Pressure is mounting however. Bank funding is under pressure and that's driving up term deposit rates, so mortgages look set to follow, Squirrel believes.

'At the moment, I really like the longer term rates,' he says. 'The three, four and five year rates are quite attractive.'

But instead of putting everything on one rate, some people prefer to spread their loans across a number of periods so they aren't exposed to a sudden rise in their weekly repayments when the whole loan comes off a fixed rate at the same time.

One drawback of splitting the mortgage across multiple fixed rate loans is it makes it harder to shift bank.

Banks will not allow borrowers to move only a part of their mortgage across to them, Tatterson says, though if a bank thinks it can get your business, it may offer to help pay any break fees your current bank threatens to charge.

IT'S PERSONAL

Norris says the mortgage splits people choose often reflect personal circumstances.

People expecting a large bonus or inheritance may opt for putting part of their mortgage on a floating rate loan, which can be repaid without break fee.

Others, whose income is dependent on commissions or contracts, may favour putting part on a floating revolving credit loan, which they can pay down rapidly when the money is flowing in, and then draw on during lean times.

WHERE ARE MORTGAGE RATES HEADED?

ANZ'S Cameron Bagrie: 'We favour the cheaper 1-2 year rates. If we're to split hairs, we have a mild preference for the one-year, simply because our forecast of a lower OCR (we expect two more cuts) suggests the one-year rate will be lower in one year's time… We think the most sensible strategy is to select the cheapest rate (the one to two year), but to keep up interest payments so as to get your principal down as soon as possible. We would also note that although the five-year rate is higher, it is historically low (at around 5 per cent), and despite the additional cost, may suit more risk averse borrowers.'
Squirrel Mortgages' John Bolton: 'Mortgage rates are going to stay low for an awfully long time, but I think they are going to come off their current lows. If you want to lock in at the bottom of the cycle, then I'd suggest now is the time to consider fixing for three or possible five years depending on your circumstances. Personally, I've just fixed my loans for three years.'
BNZ's Tony Alexander: 'If I Were A Borrower What Would I Do? Nothing new. Float one-third, fix one-third two years and one-third three years unless someone were to offer me a very juicy five-year rate. Chances of fixed rates falling from current levels look very low but jumping out to five years from the shorter terms is quite expensive.'